Oil breakdown continues as inventories rise, Fed influence diminishes

Oil Breakdown

We said the break was coming in oil (NYMEX:CLZ13) and it came with an accentuation point from the Energy Information Administration. Surging supply and the lessening of the Fed’s influence on the market should force a test to the lower end of the old support near $88. Of course, after the sharp selloff the market is overbought so we should see attempts at a rally, but barring any earth shattering news the trend for oil is decidedly lower.

U.S. oil Inventories surged to the highest level since last June and close to a record for supply at this time of year. The EIA reported that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 5.2 million barrels from the previous week. At 379.8 million barrels, U.S. crude oil inventories are above the upper range for this time of year. Total motor gasoline inventories decreased by 1.8 million barrels last week, but are near the top of the average range. Finished gasoline inventories and gasoline blending component inventories both decreased. Distillate fuel inventories increased by 1.5 million barrels last week but remain near the lower limit of the average range for this time of year. Propane/propylene inventories fell 0.5 million barrels last week and are in the middle of the average range. Total commercial petroleum inventories increased by 3.7 million barrels last week.

A refinery fire in Lamont does not seem to have the RBOB (NYMEX:RBZ13) in a panic because of ample supply. Stay tuned. Bloomberg news reports that gasoline pump prices in the U.S. are poised to drop to their lowest since February 2011 by New Year’s Eve as supplies increase more than demand, providing a lift for consumers in an economy struggling to recover from the deepest recession since the 1930s. Retail prices will probably sink to an average $3.15 a gallon by Dec. 31 from $3.344, Michael Green, a spokesman in Washington for AAA, the nation’s largest motoring organization, said yesterday. The highest seasonal inventories in three years are set to rise as plants return from scheduled maintenance.

As plants return from seasonal work, production should increase. In the past five years, refinery runs have climbed an average 303,000 barrels a day in the fourth quarter as seasonal repairs ended. The U.S. was awash in gasoline as refiners shut units for maintenance. Inventories were 217.3 million barrels as of Oct. 11, the most for this time of year since 2010, EIA data show. As many as 900,000 barrels a day were planned to be offline in October, the peak of the U.S. fall turnaround season, according to Amrita Sen, chief oil market strategist at Energy Aspects Ltd., a research company in London.

The Energy Information Administration also reports that the U.S. is heads and shoulders above the rest of the world when it comes to energy technology. The United States and Canada are the only major producers of commercially viable natural gas from shale formations in the world, even though about a dozen other countries have conducted exploratory test wells, according to a joint U.S. Energy Information Administration/Advanced Resources International study released in June. China is the only nation outside of North America that has registered commercially viable production of shale gas, although the volumes contribute less than 1% of the total natural gas production in that country. In comparison, shale gas as a share of total natural gas production in 2012 was 39% in the United States and 15% in Canada.

Shale gas dry production in the United States averaged 25.7 billion cubic feet per day (Bcf/d) in 2012, while total dry production averaged 65.7 Bcf/d. In Canada, total dry natural gas production from the two major shale plays—the Muskwa-Otter Park shale formation in the Horn River Basin of northern British Columbia and the adjacent Montney Basin that spreads over British Columbia and Alberta—averaged 2.0 Bcf/d in 2012, while total Canadian production averaged 14.0 Bcf/d. Gross withdrawals from Horn River and Montney averaged 2.5 Bcf/d in 2012, and reached 2.8 Bcf/d by May 2013. The potential for higher production from these two plays is currently constrained by limited pipeline infrastructure.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

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